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[[I "carriedback" a 2nd mortgage (installment sale) on the sale of a rental property
a few years back. I received some cash at the time of sale and the new owners
assumed the existing 1st mortgage. The 2nd mortgage was structured with
interest accruing for 3 yrs, with payments beginning in the 4th year.

Unfortunately, the owners filed bankruptcy. The 1st mortgage holder received
the property in court and the judge discharged the 2nd mortgage due to me.

Can I claim a loss for this and if so, how?]]

Possibly, yes. But you really need some professional assistance with respect to this transaction, since it can get very complicated. Heck, it is even possible, depending upon how you completed the original installment sale in the year of sale, you might even have a GAIN on the "forclosure". So you've got to make sure that you are on solid ground.

At a MINIMUM, you'll want to read IRS Publication 544 at the IRS web site.

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